Fall in UK Audit Standards (18 June)

The UK Financial Reporting Council (FRC) have just published their overall results from inspections of eight firms and identified that in 2017/18 72% of audits required no more than limited improvements compared with 78% in 2016/17. Among FTSE 350 company audits, 73% required no more than limited improvements against 81% in the prior year. The fall in quality is attributed by the FRC to a number of factors, including a failure to challenge management and show appropriate scepticism across their audits. The FRC identified “an unacceptable deterioration in quality” at KPMG. 50% of KPMG’s FTSE 350 audits required more than just limited improvements, compared to 35% in the previous year. As a result, KPMG will be subject to increased scrutiny by the FRC through inspecting 25% more KPMG audits over its 2018/19 cycle of work; and monitoring closely the implementation of the firm’s Audit Quality Plan. The FRC have stated that the Council will “hold KPMG’s new leadership to account for the success of their work to improve audit quality”.

Other actions being taken by the FRC include:

Setting out to firms earlier in the year concerns over various aspects of bank audits, including their challenge of management and provisioning against loan losses and PPI mis-selling claims.

Reviewing the effectiveness of Root Cause Analysis by the firms to identify the real causes of audit shortcomings and whether their action plans will effectively address the FRC’s concerns.

Agreeing actions with firms on all audits where shortcomings were identified.

Taking enforcement action under the Audit Enforcement Procedure where appropriate.

Implementing a new audit firm monitoring approach, focusing on five key pillars of: